ICRA: Easing rubber prices and crude oil prices to support tyre companies' margin recovery in H2 FY2023

ICRA has maintained its domestic tyre demand growth estimate at 6-8% for FY2023, driven primarily by strong growth in the original equipment manufacturers (OEM) segment and muted growth in replacement volumes. OE demand shall witness a low double-digit growth supported by factors like easing supply-related headwinds in the passenger vehicle (PV) segment, improving two-wheeler (2W) demand, and strong growth in Commercial Vehicle (CV) segment amidst a favourable macro-economic environment.

Commercial Vehicle (CV)

Replacement demand, which forms around two-third of tyre demand, is likely to witness mid-single digit growth in FY2023 following a strong FY2022. Growth in tyre exports from India was robust in FY2022, supported by healthy demand from key export destinations such as the US and European nations. However, the economic slowdown in the US and European nations is expected to impact export demand, and growth is expected to be flat in FY2023. Over the next three years, tyre demand growth is pegged at 6-8% (CAGR) supported by stable replacement demand.

Says Nithya Debbadi, Assistant Vice President & Sector Head, ICRA, “Tyre industry revenues (consolidated for ICRA’s sample of tyre manufacturers) continue to breach record high levels as they recorded a strong YoY growth of 29% during H1 FY2023, driven by stable demand and favourable realisations. The revenues in H2 shall remain supported by strong OE demand even as export prospects are subdued. For the fourth straight quarter, industry profit margins remain affected by the effect of elevated input and freight costs. However, with the softening prices of natural rubber and crude oil derivatives since July 2022 and a stable pricing environment, the industry’s margins shall witness expansion in H2 FY2023. However, the same may not be significant given the higher OE skew in the revenue mix. The margins shall remain exposed to vulnerability in movement in crude and rubber prices, going forward.”

The Tyre industry has been investing around 10% of its revenues in capacity expansion over the past few years. ICRA expects the industry to continue to invest ~10-12% of the revenues in the medium term. While part of the CAPEX shall be debt-funded, the credit profiles of tyre manufacturers would be supported by healthy earnings and cash reserves.
NBM&CW DECEMBER 2022
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